Saving for a rainy day

on 22 June 2006

When starting out in working life there is no doubt reality hits hard, most often in your pocket. What becomes most apparent is how crucial financial stability is to us all. However, even the prudent have the conflict between actually living and being frugal.

Pensions are well documented and may well be offered by employers. Aside from them, which are often seen as a distant and boring consideration, where do you start saving?

The reason for paying off debts is simple, it is highly likely what you are earning on your savings is much less, after tax than debts cost you, so use your savings to pay off your debts.

Try and clear those credit cards, a nominal payment each month seems trivial, however if left, interest accumulates at an astounding rate.

On a typical high street credit card, £2,000 debt would cost you around £340 in interest over a year. In even the best savings account £2,000 would pay you around £80 in interest after tax. So if you used your £1,000 of savings to pay off the debts, you’d be £260 a year better off.

People open bank accounts, more often than not, when they do not have an abundance of cash. Thus your first account is unlikely to pay high interest. Graduate accounts can be handy for about a year after graduating, as the overdraft is usually interest free.

However if you do not dip into the facility and still have a graduate account well into working life you could be missing out on interest. It sounds trivial but it really is money for nothing by switching to a different type of current account. You will not even need to switch providers.

Speak to your bank and see what they can offer you. This is not a difficult process so do not be deterred by the thought of paperwork.

Once your debt is cleared you may well find you have more cash to play with, and as a wise man once said: ‘If you have money in your pocket there will always be somewhere to spend it.’ This is more truthful that most of us want to believe.

It is all too easy to upgrade your car or get one on finance with your newfound wealth. However, like fruit machines, car dealers with finance agreements are not placed to make you money. In the long run, finance agreements often prove costly and give you an albatross to cart around on your neck.

Aside from saving plans it is also very important to consider your outgoings. Be objective, what do you actually need to have disappearing out of your account and what are quite simply relative luxuries?

The most common standing orders are likely to be mobile phone bills, gym membership, car insurance etc. If we consider the first two debits, in addition to cutting down on the time you spend on the phone, ensure you have the best talk plan. For example, are you paying for ‘free’ minutes you don’t use? If you are going to have a talk plan, it is important that you have the right one.

Secondly gym membership could actually save you money, if you fully utilise your membership. It is already paid for regardless of how many times you go. Therefore go as often as possible, this will give you a cheaper pastime than going to the pub.

This conveniently brings me to my second point. Do not kid yourself, having gym membership does not in itself make you fit. If you don’t go, admit it and cancel your membership.

High interest bank accounts are a great way of separating your savings from your current account. As your money is in a separate place, you can budget more easily. Decide first what you can afford to put away and do it.

Leaving ‘safety’ money behind is not recommended as it becomes easier to stray from your budget. You will also (hopefully) feel guiltier about dipping into your segregated savings than you would slightly overshooting your budget. By virtue of being a high interest account, your money is going to earn more, which is obviously the main purpose of the exercise.

To ensure you’re getting the best possible deal, shop around for the best savings accounts. Also take the time to understand what is actually on offer. For example, if we take ING Direct and First Direct as savings accounts, both are very good but offer different things.

On the surface, First Direct currently have an account that offers 5% interest and ING Direct have a savings account that offers 4.75%. It therefore would seem five is higher than 4.75 so you would be better off with First Direct. This is not necessarily the case.

With ING Direct you move your money to and from a ‘linked current account’. It takes a few days to then simultaneously leave and credit the ING account and vice versa. When funds leave ING they understandably stop earning interest.

However, although First Direct pay 5%, if you withdraw funds midway through that month the whole sum deposited does not earn interest. Therefore, the First Direct account could in essence be viewed as a one-month notice account rather than an easily accessible savings account. This is as if you do not plan a month ahead you’ll miss out on interest. Neither is better or worse, it just depends how well you generally plan.

In conclusion saving is crucial as it will allow you to take big steps in the future, such as putting a deposit down on a house to stop throwing money away on rent. Saving is all about duplicity, considering spending then making your money work for you.